Judgment handed down by High Court in first UK mid-market restructuring plan

On 19 August 2021, the High Court sanctioned the restructuring plan of Amicus Finance Plc (in administration) (Amicus).  This is the first restructuring plan of a company in administration and the first in the mid-market, following the introduction of this new UK restructuring tool in June 2020 by the Corporate Insolvency and Governance Act 2020. The restructuring plan provided for a solvent exit from administration, enabling Amicus to be rescued as a going concern and was the first time that the court exercised its discretion to apply ‘cross-class cram-down’ against a dissenting secured creditor.

Sir Alastair Norris has now handed down a very detailed judgment which helpfully establishes the balanced approach the court will seek to take when considering restructuring plans and sets out how the court will seek to ensure that there is realistic scrutiny of such plans within a tight timeframe whilst seeking to produce a fair outcome for creditors of a company in distress.

Pinsent Masons acted for the joint administrators in the case.

• Case establishes balance between realistic scrutiny of plans and fair outcome for creditors
• First application of cross-class cram-down against dissenting secured creditor
• Re Amicus Finance plc (in administration) [2021] EWHC 3036 (Ch)

The Amicus restructuring plan provided for a solvent exit from administration, enabling Amicus to be rescued as a going concern. The “cram-down” of a dissenting secured creditor is an important new development in English law and illustrates that the court will be willing to exercise its discretion if it feels that the restructuring plan is one which an honest and intelligent creditor could rationally regard as “fair” and particularly where the plan has the overwhelming support of all other creditors.

The judgment also clearly sets out that the utility of restructuring plans will be lost if the court is side-tracked into the time-consuming examination of disclosure or oral evidence which could potentially impose a heavy cost burden on small or medium enterprises seeking rescue. The judgment paves the way for more restructuring plans in the mid-market.

Background

Amicus specialised in short-term property finance and had been traded in administration by its joint administrators Mark Fry, Kirstie Provan and Jamie Taylor of Begbies Traynor since 20 December 2018. Amicus’ business funding was provided in two ways. First, commercial funders underwrote certain loans made by Amicus to its borrowers, and whilst the legal title to the loans belonged to Amicus, the benefit of the loans was held under a securitisation trust structure for the commercial funders. The second means of funding of Amicus was through direct borrowing by Amicus. The objective of the administration was a better return for creditors than if Amicus went into liquidation immediately. That better return derived principally from the ability of Amicus to continue to trade, earning fees servicing the loans within the securitisation structure and to run off the book of loans to which it was beneficially entitled. The administration proceeded in accordance with that plan until the Covid-19 pandemic struck which resulted in many loans not being redeemed on time and increased interest charges for Amicus. The remaining 70 loans presented the greatest difficulty and required the heaviest expenditure in legal fees. Anticipated cashflow was insufficient to fund the administration beyond the end of July 2021 and the administrators decided that it was in the interests of creditors as a whole for them to propose a restructuring plan. Their view was that if the plan was not approved then a liquidation of Amicus must follow.

The restructuring plan anticipated an exit from administration and a return of Amicus to solvency in order that it could be rescued as a going concern. The administrators argued that the restructuring plan would provide Amicus’ creditors with a better return than in a liquidation, which they considered to be the relevant alternative. It was proposed that once they had exited office, the administrators would continue as ‘plan administrators’ under the restructuring plan.

Terms of the restructuring plan

The restructuring plan itself compromised the claims of four classes of creditors which were expected to receive the following distributions under the restructuring plan:

• expense creditors – creditors who were owed sums that were classified as expenses of the administration and whose claims would be paid in full
• preferential creditors –preferential creditors of the administration whose claims would also be paid in full
• secured creditors –the secured creditors of Amicus (being HGTL Securitisation Company Limited (HGTL Securitisation) and Crowdstacker Corporate Services Limited (Crowdstacker)) who would each receive a 50% share of £150,000 together with amounts under an agreed waterfall which was anticipated to produce a payment of £1.267 million each
• unsecured creditors –creditors whose claims ranked as an unsecured claim in the administration and would receive a share in the sum of £75,000 which would give unsecured creditors a dividend of 2.3 pence in the pound.

The restructuring plan was to be funded by a minority shareholder of Amicus, Omni Partners LLP (Omni), which were to inject £3.127 million into the company, with Twentyfour Asset Management LLP (24AM) investing £640,000 under an existing facility. After discharging the creditors’ claims detailed above, the balance was to be used to fund trading to enable Amicus to earn loan service fees, to effect recoveries under the legacy loans to which Amicus was entitled and to pursue negligence proceedings in relation to the legacy loans, all during the period ended 31 December 2022. These recoveries would then be distributed under a “waterfall” arrangement with the funding provided by Omni and 24AM ranking ahead of the distributions to Crowdstacker and HGTL Securitisation.

Restructuring plan meetings

At the meetings of the plan creditors, all classes of creditors (save for Crowdstacker), voted overwhelmingly in favour of the restructuring plan. Whilst in the senior secured creditor class, over 50% voted in favour, as Crowdstacker voted against the restructuring plan, this meant that the requisite level of support of 75% in value of the senior secured creditor class was not reached. 

Sanction hearing

At the sanction hearing, as the administrators had failed to secure the support of 75% of the senior secured creditor class, the court was asked to exercise the “cross-class cram-down” procedure and sanction the restructuring plan. In order to do so, the administrators were required to satisfy the court of the following under section 901(G) of the Companies Act 2006 (CA 2006):

• Condition A: that none of the members of the dissenting class would be any worse off than they would be in the relevant alternative (section 901G(3) CA 2006); and
• Condition B: the proposed compromise has been agreed by 75% in value of a class who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative (section 901G(5) CA 2006).

As to Condition A, it was not disputed that the relevant alternative to the restructuring plan would be liquidation. However, Crowdstacker contended that the “no worse off” test had not been satisfied and therefore the cram down power should not be invoked. Its main objection was that Amicus’ estimated outcome statement did not attribute any value to claims which Crowdstacker alleged a subsequent liquidator or Crowdstacker itself could bring which, if successful, would put it in a better position on a liquidation when compared to its anticipated return under the proposed restructuring plan. The administrators argued that such claims were speculative, entirely without merit and, to the extent the claims were against third parties, would be unaffected by the restructuring plan.

Condition B was satisfied and was not in dispute; 100% of the expense creditor class had voted in favour of the restructuring plan, which was the only class which was anticipated to receive a dividend in a liquidation and therefore was the only class with an economic interest in the relevant alternative. 

The administrators also sought to distinguish their case from the position in Re Hurricane Energy Plc, in which Mr Justice Zacaroli had refused to apply cross-class cram-down on the basis that, in Hurricane, the company's shareholders would be deprived of all but a small share of their equity. Amicus contended that the position was different here, as Crowdstacker was estimated to receive a dividend of approximately 25.2p in the pound under the restructuring plan. Additionally, contrary to the position in Hurricane, there was no dispute that the relevant alternative would be an imminent liquidation should the restructuring plan not be sanctioned, and indeed the administrators’ claim provided for such an eventuality. The administrators’ position was that there was accordingly a requirement for urgency which justified the court taking a pragmatic approach to valuation so as not to undermine the utility of Part 26A.

Judgment

The judgment has provided some very helpful guidance in relation to future restructuring plans. Judge Norris found that with restructuring plans there was a natural tendency to focus on dissenting creditors. However, he held that that the assenting classes of creditors must not be overlooked, and he felt it was relevant that the Amicus restructuring plan had the overwhelming support of the great majority of creditors and even within the senior secured creditors there was a majority in favour of the restructuring plan.

Norris stated that creditors are the best judges of their own interests and they may be expected to behave rationally. He found that the Amicus restructuring plan was a rational one and it was understandable why it was attractive to most creditors. The expense and preferential creditors would be paid in full out of injected funds. The unsecured creditors would receive something rather than nothing, also out of injected funds. The injected funds would be used to sustain trading operations so as to yield a fee income to effect a recovery of legacy loans where Amicus has a beneficial interest and to pursue professional negligence claims against Amicus professional advisors. It was anticipated, although not guaranteed, that there would remain a sizeable distribution surplus for the ‘super senior’ secured creditors who otherwise stood to recover nothing.  Norris found that what underpinned the Amicus restructuring plan was the anticipation that recovery by a trading company would exceed recovery by a company in liquidation even if that meant the company going back to its shareholders and directors.

Norris gave important guidance in relation to the evidential burden in respect of the “no worse off” test. As Amicus was in administration, the relevant alternative was liquidation and the contested area was valuation. Norris found that it was for the administrators to demonstrate that the secured creditors would be no better off in the relevant alternative of liquidation and that this had to be established on the balance of probabilities – not, as Crowdstacker submitted on the basis that the administrators had to demonstrate that there was “no real prospect” of a better outcome for Crowdstacker.

Practical implications

This ruling is significant in that after the Virgin Active judgment, this was only the second fully opposed cross-class cram-down decision and the first involving the cram-down of a secured creditor. It is also the first restructuring plan promoted by insolvency officeholders and illustrates that the restructuring plan procedure can be used to rescue a company as a going concern, even after administration, and restore it back into the hands of its former directors and shareholders.

This case also demonstrates how useful restructuring plan exits can be as a restructuring tool where administrators are working through intensive long tail collection processes, particularly in the financial services sector. The decision also importantly sets the path for more restructuring plans to be sanctioned in the mid-market, as the plan and explanatory statement were both in significantly shorter form than has been seen in previous restructuring plans.

This case shows that the court is not afraid to use its powers to cram down a secured creditor if the dissenting creditor cannot satisfy the court that it is any worse off in the relevant alternative. It is likely that the restructuring plan tool will be more readily used as a result of the decision in Amicus Finance plc, which is compatible with the legislative intention of parliament. It may not be long before we start to see the circa 50-100 restructuring plans each year that the government anticipated and the restructuring plan being used more readily in the mid-market, which can only be positive for the reputation of the restructuring profession and ultimately the UK economy.